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Foreign vs. domestic public debt and the composition of government expenditure: A political-economy approach

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  • Philipp Harms

    (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)

  • Joachim Lutz

    (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)

Abstract

We consider an economy in which a political-support maximizing government takes into account different generations' preferences when deciding how much to borrow abroad and how much to spend on public consumption and investment. We show that, in equilibrium, the government's choices are shaped by three parameters: the effect of government spending on output, the expected output costs of a default, and the relative political weight of the generations currently alive. We conclude that the joint dependence on these parameters establishes a strong, but non-linear relationship between the share of foreign debt in total public debt and the share of investment in total government spending.

Suggested Citation

  • Philipp Harms & Joachim Lutz, 2014. "Foreign vs. domestic public debt and the composition of government expenditure: A political-economy approach," Working Papers 1415, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 20 Nov 2014.
    • Handle: RePEc:jgu:wpaper:1415
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